FINANCIAL EXECUTIVES INSTITUTE Current Financial Reporting Issues Conference New York, New York November 10, 1997 INTERNATIONAL ACCOUNTING STANDARDS: Progress and Challenges Remarks by Michael H. Sutton Chief Accountant Office of the Chief Accountant United States Securities and Exchange Commission Washington, DC __________________________________ The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Mr. Sutton and do not necessarily reflect the views of the Commission or the other members of the staff of the Commission. Introduction Thank you for inviting me to participate in this panel discussion to explore the initiatives to harmonize accounting standards internationally and the challenges that lie ahead. Last month the Commission issued a report to Congress that discusses the background, goals, and progress of harmonization efforts to date. That report is available to the public through the Commission's public reference room. My remarks this morning are based in part on that report. Capital Market Regulation in the US In the United States, regulation of our capital markets is based on a system that prescribes minimum initial and continuing disclosures by companies that seek capital from the investing public. Under this system, investors or their representatives, and not regulators, assess the quality and suitability of investment opportunities, based on public information provided in the market place. The regulatory goal is to promote informed investment decisions based on full and fair disclosures and to prevent misleading or incomplete disclosure. So, it is understandable that the Commission views high quality accounting and disclosure standards, and credible financial reporting, to be critical to the effectiveness of US markets and the interests of US investors. The disclosure system in place today requires domestic registrants to file financial statements prepared in accordance with US generally accepted accounting principles. Foreign registrants are permitted to file financial statements prepared in accordance with US, home country, or international standards, provided that, if standards other than US standards are used, a reconciliation to US generally accepted accounting principles also is presented. I think it is important to emphasize that this system does not impose a higher disclosure standard for foreign registrants than for domestic companies. Rather, it is designed to assure that all companies coming to US markets provide disclosures that are useful to US investors and protect investor's interests. International Dimensions In today's global environment, companies that seek access to capital markets in more than one country may have to comply with accounting and disclosure requirements that differ in significant respects from market to market. Concerns that these differing requirements may unnecessarily increase compliance costs, or create unnecessary inefficiencies in cross-border market activity, led securities regulators around the world to begin several projects to explore ways to reduce differences in accounting and disclosures. These initiatives seek not only to increase the efficiency of cross-border capital flows, but also to improve the quality and reliability of information provided to capital market participants. The International Organization of Securities Commissions (IOSCO), of which the SEC is a member, has been the principal instrument for harmonization efforts by securities regulators around the world, including efforts to work with the IASC to develop a core set of accounting standards that would serve as a framework for financial reporting in cross- border securities offerings. In 1994, IOSCO reviewed the then existing IASC standards and identified standards that needed to be improved before acceptance could be considered, including areas in which there are "essential issues," issues deemed critical to the success of the project by some countries. Other reservations, referred to as "suspense" issues, also were identified. Suspense issues are issues that would not require resolution before endorsement could be considered, but are issues for which individual jurisdictions might specify required treatments if those issues were not addressed by the IASC. In July 1995, IOSCO and the IASC agreed on a core standards work plan, and in April 1996, the Commission released a statement of support for those efforts. That statement indicated that, if the IASC successfully completes the agreed-upon work plan, and if those standards satisfy the conditions for acceptance described by the Commission in its April statement, the Commission would consider accepting the core standards in securities offerings by foreign registrants. If the Commission considers changes to its current accounting and disclosure requirements, it will have to evaluate the impact of potential changes on capital formation, including the possible impact on the cost of capital for domestic companies, and, critically, on investor protection. The Commission's April 1996 statement articulated the key elements that will guide its assessment of the acceptability of the IASC core standards. Specifically, the Commission will consider whether the standards constitute a comprehensive basis of accounting; whether they are of high quality, that is, whether they result in transparency and comparability and provide for full disclosure; and whether they can be and will be rigorously interpreted and applied. Some additional issues that the Commission also will have to be considered include the following: Transition Issues Although financial statements produced by the completed standards may be judged acceptable for cross-border offerings, historical financial statements prepared in accordance with prior standards will not reflect the improvements achieved by the core standards program. Thus, the timing of acceptance of international standards will need to be addressed, and those decisions will be affected by the transition provisions adopted by the IASC. "Suspense" Issues Although individual "suspense issues" are relatively narrow concerns, the number and significance of suspense items not addressed, particularly if the number is large and the issues collectively are significant, may impact the overall assessment of the core standards. Further, because IASC standards tend to provide less explicit guidance than US standards, some additional guidance for filings in US markets is likely to be needed. An open question is whether the additional interpretive issues will be so significant that the core standards may not be operational, either because they cannot be uniformly applied or because the extent of the additional guidance required would be so great that endorsement would not improve significantly the efficiency of cross-border filings. Specialized Industry Practices You may be aware that the core standards project, and the work plan agreement between IOSCO and the IASC, does not cover specialized industry accounting practices. These practices are expected to be addressed as "suspense" issues, which means that individual jurisdictions can be expected to continue to specify the required accounting and disclosure. Supplemental Disclosures Currently, the Commission's supplemental interpretive and disclosure requirements apply to both domestic and foreign registrants. As it evaluates the IASC core standards, the Commission will need to consider whether these supplemental requirements should continue to apply, regardless of the basis of accounting used to prepare the financial statements. Accomplishments and Prospects Clearly, the work of IOSCO, both independently and in the IASC core standards project, is an important effort to improve capital market reporting around the world. Because of the importance of this initiative, the Commission has devoted significant resources to the project and expects to continue to do so. Desires to increase the access of US investors to foreign investments in the US public markets and to increase the efficiency of access to US capital markets by foreign registrants, however, should be pursued in ways that do not compromise the interests of US market participants, both investors and those competing for capital at the lowest cost. At this point, we can't predict what the final decisions of IOSCO or the Commission regarding the core standards project will be. Going forward, the staff will continue to provide comprehensive and timely input so that the IASC has an opportunity to address our concerns as it debates its standards. We will continue to make every effort to foster the development of international standards that will yield the transparency, comparability and disclosure that characterize US standards and that US investors expect. * * * * * * * That concludes my prepared remarks. I would be pleased to respond to your questions.